Spiraling Costs to Take Toll

Spiraling Costs to Take Toll

State of the Profession, 2006: SBA economist reports inflation worrisome; prices expected to grow 5.1 percent in 2006
Jun 01, 2006

NATIONAL REPORT — It was the report heard around the world. Equity and stock markets in the United States and Britain fell May 17 after the U.S. Department of Labor Bureau of Labor Statistics (BLS) reported that consumer prices rose more than expected in April. The Dow Jones Industrial Average fell 1.9 percent to account for the largest daily decline in almost four months.

"What caused the stock market to go down, obviously was the fear of inflation, brought on mostly by energy costs," says Chad Moutray, chief economist for the Office of Advocacy of the U.S. Small Business Administration (SBA).

Timing is everything
An already volatile FTSE 100 followed suit with a 3-percent plunk, and the news rippled through Asia and Australia the next day as Japan's Nikkei Average fell 1.35 percent; Seoul's Kospi fell 3.2 percent; Hong Kong's Hang Seng Index shed 2.1 percent, and the Jakarta Composite lost 4.19 percent. In Sydney, the S&P/ASX lost 1.85 percent.

Global inflation anxieties continued in subsequent days, putting investors on their heels, consumers uncertain and the government poised to continue to raise interest rates. Many analysts say traders are over-reacting to send a message to Federal Reserve Chairman Ben Bernanke — who raised the core interest rate a quarter-point to 5 percent earlier in the month — that raising the rate again in June could slow the economy too much. Higher rates could cool foreign investment, too. It was the 16th-consecutive rate hike since June 2004, and many investors thought the country's head economist would take a break from reigning in consumer spending.

But that is the Fed's No. 1 job, Moutray says, so he doesn't expect them to take their foot off the brake just yet.

"If inflation is not an issue, then they can worry about other things like economic growth. But Bernanke wants to make sure that he is seen as an inflation hawk because the markets don't like inflation," he says. "So they are going to have to continue to raise interest rates to slow down the economy."

Higher rates of inflation might not be a forgone conclusion as of yet. The current environment is "controllable", but the Fed has their work cut out for them as higher energy costs, slower real-estate markets and inflated rents continue to crimp consumer confidence. The economy and small business appear to have weathered pumped-up fossil fuel costs thus far, Moutray says, "but as those prices stay high, you are going to start to see more effects of that."

DVMs say rising costs are the most pressing concern for veterinary medicine.
It might seem like déjà vu from the 1970s, but one major difference is that today's prices are driven by heightened demand instead of shrinking supply. Of course political fallout between Venezuela and Iran, as well as diminished refining capacity in the Gulf of Mexico, have affected supply a bit, but the real price pressures exist due to ravenous U.S. appetites for fuel and burgeoning industrialization and automobile proliferation in developing countries, especially China and India.

"The challenge (to the Fed) is that energy costs are a large chunk of that inflation, and that's demand driven," Moutray says. "And until people change their behaviors or unless you can control the worldwide demand for oil, then it's going to be very difficult for a domestic entity to control a global phenomenon."